Buying to let? Read this first
I’m always surprised how often prospective landlords come into Kings and say: “Okay, where should I buy?”
Now, even though Tunbridge Wells is an excellent town for a buy-to-let investment, that’s not a straightforward question, simply because any buy-to-let purchase involves multiple considerations.
And at this point, you’re probably thinking, yes, okay, but seriously, where should we buy?
Well, a short answer is that any property within a mile of Tunbridge Wells town centre is a very safe bet, not least because you have a reliable if expensive commuter line to London. Unsurprisingly, the rents around the station usually command premium levels, and things like having your own parking is a huge bonus and can help attract a premium in the rental price. What’s more, all the schools in this area have good reputations…
Not only that but we have some large employers such as AXA PPP and the Ministry of Defence, which means there’s no shortage of high-calibre people who are long-term renters.
But there again, you could get more property for your money if you look at areas just outside of town or in a village location
Whichever area you fancy, there’s no avoiding the fact that there’s a big shortage of properties to buy in Tunbridge Wells and competition is fierce on all properties up to around £250,000. Over the last few years about 80 per cent of viewings have been for buy to let, as people aren’t getting the return on investment they’d like from savings or other investments.
And whereas stocks and shares can be hit by a multitude of factors beyond your control, making them a bit like betting on a horse, with a property you’re able to pretty much find out all you need to know about it, and how likely it will perform for you. Not only that, but it’s a nice safety net if you’re employed and were to lose your job.
The other side of the coin is that although property prices are going up, rental values remain steady, making yields more typically 4-6 per cent rather than the traditionally hoped-for 6 per cent.
For those looking to purchase a buy to let property, the shortage of stock means it can be tough to find the bargains and ‘below market value’ deals investors should be looking for.
More on ‘below market value’ in a second but let’s just clarify what we mean by yield because it can mean different things to different people. The easiest way to look at it is that it’s the total amount of rent, less the running costs of the property, divided by the total value invested in the property, including buying costs.
So how do you estimate rent? You can buy the local paper and find some equivalent properties, or you can ask us, the letting professionals. But it’s important not to be too optimistic in your estimations, as you have to remember that there may be gaps when the property is unlet. More on this “void period” in a minute.
As for those running costs, consider ground rent, service charges, insurance premiums, replacement fixtures and fittings, and of course if you get unlucky with a bad tenant, then the services of a solicitor.
Some landlords choose to buy a property which will have a nil or negative yield, meaning the costs are higher than the rent. They’re banking on being able to increase the rent at some point, and possibly on getting a better rate of borrowing. ‘Below market value’ is an advanced, long-term strategy and requires a solid understanding of how desirable the home and areas are. It’s not enough to rely on wishful thinking.
Factors like this are so important to consider because it’s vital to see landlord mortgages as serious businesses rather than easy investments that are bound to work out. For example, your first consideration is to find a property that ticks the right kind of boxes as I’ve already mentioned.
Then you need to consider the long-term, the likely capital growth. For value, look at areas that are up and coming and also ask if you could get a good price if you had to sell the property in the short term.
Industry data from the third quarter of last year show that the average asking price for a three-bedroom house in Kent was £239,950. The figure for the same period the previous year was £230,000, an increase of 8 per cent.
Consumer confidence is key to unlocking the property market and it’s at its highest level in four years. Four in five think that average asking prices will be higher in 12 months’ time and, crucially, research indicates that there will be more first-time buyers in the market, too.
Those who are forecasting over a five-year period see 2016 and beyond as crunch time for the property market. They don’t believe a “housing bubble” is forming, so aren’t predicting a crash.
So it’s definitely a rising tide, especially when you consider that the demand for new housing in the South East is still massive and shows no signs of abating. This demand means that we’re in a very different situation from the late eighties and early nineties when property prices fell so sharply and for so long.
So, once you’ve decided to buy, should you opt for freehold or leasehold? For example, if you were to buy a leasehold flat, you will pay service charges, meaning it’s important you break down the costs re your net return. Fail to do so and you might discover your investment isn’t quite as clever as you thought.
But again, there’s always a contrary view, and some people prefer a management company in a leasehold set up to take care of things so that it’s one less thing for them to worry about. One final thought on the subject is to warn you of leaseholds that are advertised as having no service charge quoted. This is dangerous territory as you could be stung with a levy of thousands of pounds if something goes wrong with the building, so proceed with caution here
As for using agents like us, the fees vary according to the service. In some cases, if the agent simply introduces you to a suitable tenant for the property, you can expect to pay them the first month’s rent. At the other end of the scale, for a fully managed service you would usually pay in excess of 10 per cent of the rent each month.
Once you’ve bought the property, what happens when it falls vacant? I’m always amazed when a landlord tells me a prospective tenant’s offered them £625 per month when the asking price was £650… and they’ve said no. Okay, that’s fine if you can afford it, and I understand that some people want to hold out for the full price or for tenants who want a longer term contract, but you do need to do the maths carefully because in many cases you’ll lose out in the long term by turning down that month’s rent offered to you there and then
The period in which a property is not let is known as the “void period” and it can really hit you in the pocket. Don’t forget that you may also have to pay for council tax, utilities and your insurance premium may go up if the place is furnished but empty.
One solution is to let at a rent just below the market average. The advantages are that you will have fewer if any void periods, you will be able to pick the best tenants, and will have to fork out on fewer enticements such as gizmos in the kitchen or a refurbished bathroom to make the property appealing.
And finally, who makes a good landlord – what are the qualities that will tip the scales in your favour? I would say that a real interest in property is essential, as you will have to spend many hours doing your research and, of course, visiting properties to check them out.
You’ll also need to think independently, as you will come up against vested interests – obviously I’m not talking about estate agents – who will try to convince you that this is a really great buy in a great area. For example, you’ll need to dig deep and find out what other developments are planned for the area – a couple of restaurants and a Sainsburys local would be a good thing, an abattoir not so good – before you make your decision.
In summary, if you are prepared to juggle many plates and keep your eye on all the factors relating to landlord mortgages, all the signals are that your buy-to-let enterprise in this area will be a success. And with that I will say thank you very much for reading this and good luck.
Gemma Heath, Kings Estate Agents – 17 years estate agency experience, so if you need advice please do not hesitate to contact me.